Instruction on Lending Restrictions

Registered in the Ministry of Justice of the Kyrgyz Republic October 7, 2004. Registration number 109-04

	Approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated September 15, 2004 No. 24/4

INSTRUCTION on lending restrictions

(As amended by resolutions of the Board of the National Bank of the Kyrgyz Republic dated October 23, 2004 No. 26/3, November 16, 2012 No. 43/1, November 27, 2014 No. 53/9)

1. General Provisions

1.1. This Instruction is developed in accordance with the Laws of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic" and "On Banks and Banking Activity in the Kyrgyz Republic". The Instruction applies to all commercial banks and the State Development Bank of the Kyrgyz Republic (hereinafter referred to as "banks").

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 16, 2012 No. 43/1)

1.2. The purpose of this regulatory act is to establish lending limits, as well as requirements and procedures mandatory for banks to execute.

1.3. Lending limits are risk restrictions per one borrower and persons associated with him (hereinafter in the text "one borrower"), established by the National Bank of the Kyrgyz Republic (hereinafter referred to as "NBKR"), through the economic standard "Maximum size of risk per one borrower".

2. Procedure for calculating the standard of the maximum size of risk per one borrower

2.1. The standard of the maximum size of risk per one borrower (K1) is calculated using the following formula:

K1 = TZ / NAC x 100%,

where under total debt, or claims - TZ - the total debt of one borrower on:

• loans (regardless of the repayment term);

• factoring;

• financial leasing;

• interbank placements;

• investments in the form of debt obligations;

• accrued interest receivable;

• any other type of direct or indirect issuance of funds to borrowers that are essentially credit substitutes;

• the amount of off-balance sheet obligations (guarantees, letters of credit, obligations to issue loans) issued to this borrower;

• any risk of the bank regarding a third party, which is unconditionally guaranteed by this borrower;

• previously written-off loans, including interest. In the credit file of each borrower, information on previously written-off loans and interest of this borrower and persons associated with him must be filed, which must contain the following information: the name of the borrower and persons associated with him, the amount of the written-off loan and interest, the date of write-off, and the reason why this debt was written off. If such are absent, then the credit file must contain a conclusion of an authorized person of the bank that there is no previously written-off debt of this borrower and persons associated with him.

NAC - net aggregate capital of the bank.

2.2. The maximum size of risk per one borrower, not associated with the bank, must not exceed the following values:

• for borrowers, except banks (K1.1) - no more than 20%;

• for banks (K1.3) - no more than 30%.

2.3. Limits and procedures for lending to persons associated with the bank are determined in accordance with the Instruction "On requirements for operations with insiders and affiliated persons", approved by Resolution of the Board of the National Bank of the Kyrgyz Republic No. 34/10 dated December 10, 2003.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 16, 2012 No. 43/1)

2.4. In order to comply with the economic standards and requirements specified in this Instruction, and to further reduce risks, banks are recommended to establish internal lending limits, which must be lower than the limits established by the NBKR in clause 2.2 of this Instruction.

3. Exceptions from the calculation of the standard of the maximum size of risk per one borrower

3.1. Exceptions not related to collateral:

3.1.1. Funds in the correspondent account at the NBKR.

3.1.2. Funds placed in commercial banks whose rating is equal to or higher than the long-term creditworthiness rating of Aaa, assigned by the rating agency Moody's Investors Service (USA)((2) see Note), as well as loans guaranteed by such banks. In order to fall under this exception, the bank must have relevant documentation confirming the assigned rating, in particular: the name of the rating agency, dates of the initial assignment of the rating and the last confirmation of the assigned rating, an acceptable source of information about the rating, as well as the last annual report of the correspondent bank.

3.1.3. Bank investments by acquiring securities of the Government of the Kyrgyz Republic, NBKR, or securities for which there are unconditional guarantees of the Government of the Kyrgyz Republic or NBKR.

3.2. Exceptions related to collateral:

3.2.1. When calculating the standard of the maximum size of risk per one borrower, only those claims that are secured by:

• securities of the Government of the Kyrgyz Republic and NBKR;

• funds located in a separate deposit account in this bank.

3.2.2. Claims to state bodies of the Kyrgyz Republic, or off-balance sheet obligations accepted by the bank, for which there is a state guarantee.

3.2.3. Claims secured by securities of the Government of the Kyrgyz Republic and NBKR or securities for which there are unconditional guarantees of the Government of the Kyrgyz Republic or NBKR. In this case, the market value of such securities must exceed the principal amount of the loan by at least 20%.

The loans specified in sub-clauses 3.1.3, 3.2.2, and 3.2.3 of this Instruction, issued to state bodies of the Kyrgyz Republic, and guarantees issued by the Government of the Kyrgyz Republic, must be properly documented, including confirmation of their reflection in the budget of the Kyrgyz Republic in accordance with the legislation of the Kyrgyz Republic. In this case, guarantees issued by the Government of the Kyrgyz Republic must not exceed 60% of the size of the net aggregate capital of the bank.

3.2.4. Claims secured by funds located in a separate deposit account in this bank. A separate deposit account is understood as a segregated deposit account of an individual or legal entity. Client settlement accounts and the bank's correspondent account cannot be used as collateral.

In this case, the following conditions must be met:

• the deposit certificate or deposit book must be stored in the bank;

• the credit agreement and pledge agreement must provide that the bank has the right to levy execution on the funds located in the separate deposit account of the borrower in an unaccepted manner in case of non-performance of his obligations;

• in any case, the bank must develop relevant procedures and carry out internal control ensuring the safety of the deposit until the end of the term provided for in the agreement;

• funds in the deposit securing the claims must be in the national currency of the Kyrgyz Republic, or in a currency freely convertible into Kyrgyz som, based on publicly available and reliable currency quotes. In this case, if the deposit is in the same currency as the claim, it must cover the amount of the claim by at least 100%, and a deposit in a currency different from the currency of the claim - by at least 120% in som equivalent;

• mandatory weekly revaluation of the deposit, in case if monetary funds in a currency different from the currency of the asset are provided as collateral for the asset.

3.2.5. Claims to Governments or Central Banks of countries that are members of the Organisation for Economic Co-operation and Development (OECD), or claims guaranteed by them, or international financial institutions (EBRD, ADB, etc.).

3.2.6. Off-balance sheet obligations accepted by the bank, for which the beneficiary is the Central Banks or Governments of OECD member countries.

3.2.7. The sum of the share of participation in the loan sold by the bank to another bank without the right of repurchase. This means that the acquiring bank fully assumes the risk of non-repayment of the loan on the same conditions on which the acquiring bank usually issues a loan. The loan participation agreement must provide that in case of non-performance of obligations, the risk of loss of each bank depends on the percentage ratio of their participation in the loan. When acquiring a loan, NBKR standards on limiting the maximum size of risk per one borrower must be observed.

4. Requirements for collateral securing the exception from the calculation of the standard of the maximum size of risk per one borrower

4.1. If the subject of the pledge is securities and/or monetary funds, the pledge is carried out in the form of a pledge in accordance with the legislation of the Kyrgyz Republic.

4.2. If the subject of the pledge is dematerialized securities, the bank must have documentation confirming the registration of this pledge in accordance with the legislation of the Kyrgyz Republic. In this case, the bank must provide that the bank's claims for collection of the subject of the pledge are priority.

4.3. The pledge is оформляется (documented) in accordance with the Civil Code of the Kyrgyz Republic, Law of the Kyrgyz Republic "On Pledge" and other normative legal acts of the Kyrgyz Republic.

4.4. The pledge agreement must provide for the prohibition of further re-pledge in accordance with the legislation of the Kyrgyz Republic.

4.5. In case of a decrease in the market value of the subject of the pledge, the bank is obliged to immediately demand an increase in its value in accordance with the requirements of this Instruction and ensure the execution of this requirement within 10 working days.

4.6. The bank is obliged to develop relevant procedures and carry out internal control to maintain the pledge in accordance with the requirements of sections 3 and 4 of this Instruction.

4.7. If the requirements of the legislation of the Kyrgyz Republic and this Instruction regarding the pledge (including the procedure for registration of the pledge, the presence of relevant documentation, dispositive powers regarding the pledge, certified properly, etc.) are not met, the claim will not fall under the exception from the calculation of the standard of the maximum size of risk per one borrower.

4.8. The share of the loan not falling under the requirements of sections 3 and 4 must be considered in accordance with the general rules of this Instruction when calculating the standard of the maximum size of risk per one borrower.

5. Requirements for limiting concentration risk

5.1. The total debt of one borrower exceeding 10% of the size of the net aggregate capital of the bank is considered a large risk.

5.2. The total amount of all large risks of the bank must not exceed five times the size of the net aggregate capital.

5.3. Each claim constituting a large risk must be approved by the Board of Directors of the bank. The minutes of the meeting of the Board of Directors must clearly indicate approval for its issuance, as well as the voting results of each member of the Board of Directors.

5.4. The condition of clause 5.3 of this Instruction applies to any additional claim to an existing borrower if it falls or continues to fall under the definition of a large risk.

5.5. The total size of loans not secured by collateral must not exceed 50% of the size of the net aggregate capital of the bank.

6. Associated persons

6.1. When calculating the standard of the maximum size of risk per one borrower, the debt of various borrowers must be summed up and considered as a single total debt if financial difficulties of one borrower can lead to payment problems for other persons.

6.2. In particular, the debt of various borrowers must be summed up if:

• one borrower controls another((3) see Note);

• a loan is issued to both a general partnership and a participant of this general partnership (general partner);

• a loan is issued to both a limited partnership and a participant of this limited partnership (general partner);

• they have at least one controlling person or significant participant, except in cases where the controlling person or significant participant is a state body of the Kyrgyz Republic;

• there is significant financial interdependence between several borrowers. Significant financial interdependence, including an agreement on mutual cooperation, exists, as a rule, if 50 or more percent of the annual gross income/expense or other receipts or payments of one borrower arose from transactions with another borrower;

• the same source is used for loan repayment, including a situation where borrowers use loan funds to participate in a joint venture or common activity, or when both use the same secondary source of payment (collateral);

• one of the borrowers guaranteed the obligations of the other (cross guarantees), or when the same third party is a guarantor for both borrowers;

• funds received by one or several borrowers are used for the direct benefit of a third party, except for state bodies of the Kyrgyz Republic, (regardless of whether the bank had a claim to this third party or not), or when funds or assets purchased with these received funds are transferred to a third party, except in cases of purchase of goods or services in the ordinary course of business.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 27, 2014 No. 53/9)

7. Procedure for applying this Instruction in cases of non-compliance with established restrictions

7.1. If the maximum size of risk per one borrower at the time of the occurrence of the risk allowed the bank to comply with the restrictions established by this Instruction, but subsequently exceeded them (for example, due to changes in exchange rates), the bank is obliged to immediately inform the NBKR about this fact. The NBKR may, without applying sanctions, establish a certain period of time during which this non-compliance must be eliminated.

7.2. If on the date of entry into force of this Instruction the bank has an existing risk per one borrower, and this risk exceeds the limits and requirements established by this Instruction, obligations to the bank may be fulfilled in accordance with their original terms and conditions. Nevertheless, from the moment of entry into force of this Instruction, the bank cannot accept new risks regarding such borrowers if the increase in the existing total risk regarding such borrowers or a group of associated borrowers does not comply with the requirements of this Instruction.

7.3. If an obligation of the bank (both on-balance sheet and off-balance sheet) arising before the entry into force of this Instruction may lead to exceeding the limits and requirements established by this Instruction, the bank may accept such a risk on condition that it is obliged to fulfill this obligation, and this obligation is confirmed by relevant documentation. In this case, accepting this risk will not harm the bank, the interests of depositors, and other creditors. In this case, the requirements of clause 7.2 of this Instruction apply.

8. Reporting

8.1. The bank is obliged to constantly maintain a database and keep a register of accounts for associated persons, which must contain information on all claims to each borrower and persons associated with him.

8.2. The bank must submit to the NBKR information on all large risks as of the last day of each month, inclusive (Appendix 1).

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 23, 2004 No. 26/3)

8.3. The bank must submit to the NBKR information on all correspondent banks having a rating in accordance with clause 3.1.2 of this Instruction, as of the last day of each quarter, inclusive (Appendix 2).

8.4. In case of occurrences of non-compliance with the requirements of this Instruction, the bank must submit information on them to the NBKR as of the last day of each month, inclusive (Appendix 3).

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 23, 2004 No. 26/3)

9. Other requirements

9.1. Members of the Board of Directors and the Board of the bank, who are part of the collegial body for issuing a loan, who approved the issuance of a loan in violation of the requirements of this Instruction, are responsible for the repayment of debt to the bank for this claim or operation.

9.2. If the issuance of a loan or the conduct of an operation is carried out in violation of the requirements of this Instruction, and as a result the bank incurred losses, then each member of the Board of Directors and the Board of the bank, who is part of the collegial body for issuing a loan and approved the operation, is responsible in accordance with the legislation of the Kyrgyz Republic.

Notes:

(1) Approved by Resolution of the Board of the NBKR No. 34/10 dated December 10, 2003, and registered in the Ministry of Justice of the Kyrgyz Republic, reg. No. 2-04 dated 5.01.04.

(2) or an equivalent rating assigned by the following rating agencies: Standard & Poors (USA), Duff & Phelps (USA), Fitch IBCA (Great Britain), Thomson Bank Watch-BREE (Great Britain), Moody's Investment Service (Japan).

(3) The concept of "control" is defined by the NBKR Instruction "On requirements for operations with insiders and affiliated persons of commercial banks and other financial and credit institutions licensed by the NBKR" (see footnote 1).

	Appendix 1

INFORMATION on borrowers

No.	Name of borrower	Information on borrowers									Share of financial participation (shares) of the company owned by the bank	Share of shares of the bank owned by the company or individual
Total debt
Group	Loans and financial leasing	Interest rate	Other assets	Interest rate	Off-balance sheet obligations	Total	Classification category	Overdue debt (in days)
1	2	3	4	5	6	7	8	9	10	11	12	13
1	Borrower A and persons associated with him, total:
Borrower A	1
Associated company B	1
Associated company C	1
...	1
2	Borrower X and persons associated with him, total:
Borrower X	2
Associated company Y	2
Associated company Z	2
...	2
..
..
15
16	Total amount of all large risks
17	Largest debt per one client

(*) If there are no large risks in the bank or there are less than 15, then in the remaining rows, after filling, the largest total debt is indicated in descending order. If there are more than 15 large risks in the bank, then their list must be submitted separately on paper in the same order and form.

	Appendix 2

INFORMATION on correspondent banks

No.	Name of correspondent bank	Assigned rating	Name of rating agency	Date of rating assignment
1
2
3
4

	Appendix 3

INFORMATION on cases of non-compliance with the requirements of this Instruction

	Name of borrower and persons associated with him	Balance of total debt (TZ) as of the reporting date (thousand som)	Amount exceeding the standard (thousand som)	Repayment date according to the contract	Number of extensions	Classification
1
2
	Total total debt